Understanding the Role of

Technology in Service Innovation:

A Theoretical Overview

TATIANA ROJAS GIRALDO

Master of Science Thesis

Stockholm, Sweden 2010
 Understanding the Role of
Technology in Service Innovation:
A Theoretical Overview

Tatiana Rojas Giraldo

Master of Science Thesis INDEK 2011:100

KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
 Master of Science Thesis INDEK 2011:100

Understanding the Role of Technology

in Service Innovation:
A Theoretical Overview

Tatiana Rojas Giraldo

Approved Examiner Supervisor

2010-06-20
Tatiana Rojas Giraldo Staffan Laestadius
Commissioner Contact person

Abstract
Innovation is not exclusive to manufacturing, services firms are also innovative. Moreover,
services firms are responsible for a large portion of the GDP worldwide and the trend shows
how this indicator has been increasing the last years in developed countries. Technology has
played an important role in this rise of the service sector in developed countries,
contributing to improve productivity. However, there is a new role for technology in
services, which has origin in technological change. The new main role for technology is as a
source for innovation, since technology is enabling and facilitating innovation in services
firms. Understanding this new role contribute to service firms to respond properly to the
challenges of modern economy, gain sustainable competitive advantage for the firm,
improve performance in service innovation and generate more variety in response to the
customers’ needs.

This thesis is submitted in partial fulfillment of the requirements for the degree of Masters
of Entrepreneurship & Innovation Management at KTH, and it compiles the most important
aspects to establishing the role of technology in service innovation, contributing at the
same time to a better understanding of this phenomenon. To do so, the first chapter
exposes the introduction and the methodological explanation. In the second chapter, the
importance and characteristics of the services sector in developed countries is explained.
Next, in the third chapter, the relationship between services and innovation is analyzed. In
the fourth chapter, describes the most relevant aspects of the relation between technology
and service innovation from three dimensions: services as users of Information technology,
agents of technology diffusion and producers of technology. Finally, in the last chapter,
conclusions are presented.
 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Table of Contents
Abstract ................................................................................................................................................... 1
Table of Figures ....................................................................................................................................... 6
Table of Tables ........................................................................................................................................ 7
1 Introduction .................................................................................................................................... 8
1.1 Background ............................................................................................................................. 8
1.2 Research Objectives and Question ......................................................................................... 9
1.3 Methodology ........................................................................................................................... 9
1.4 Limitations............................................................................................................................... 9
1.5 Structure ............................................................................................................................... 10
2 The Service Sector and Innovation: Breaking Paradigms ............................................................. 11
2.1 Service Activities are Not Homogenous ................................................................................ 11
2.1.1 Services Definition ........................................................................................................ 11
2.1.2 Services Dimensions ...................................................................................................... 13
2.2 The Tertiary Sector is Not a Parasitic Sector ......................................................................... 13
2.2.1 Services are Not Residual Activities .............................................................................. 13
2.2.2 Services are Intensive in Low Skill Labor Force ............................................................. 15
2.2.3 Services Activities are not Isolated Activities ................................................................ 16
2.2.4 The line Between the Tertiary and Secondary Sectors is not Clear .............................. 18
3 Shaping Innovation in the Service Firm ........................................................................................ 20
3.1 Building a Frame for Innovations in the Service Firm ........................................................... 20
3.1.1 Targets Susceptible to Innovation in the Firm .............................................................. 20
3.1.2 Types of Innovation in Services..................................................................................... 21
3.1.3 Extent of Novelty Involve in Service Innovation ........................................................... 22
3.1.4 The Market is the Natural Limit for Innovation ............................................................ 23
3.2 Innovation Patterns in Services Firms ................................................................................... 23
4 Service innovation and Information Technology .......................................................................... 26
4.1 Sources of Technological Innovations in Services ................................................................. 26
4.2 Services as Users, Producers and Agents of Information technology .................................. 27
4.2.1 Information Technology adoption and innovation in services ..................................... 27

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

4.2.2 Services as Sources of Technology ................................................................................ 28

4.2.3 Services as Agents of Technology ................................................................................. 29
4.2.4 Other Relations between Technology and Service Innovation ..................................... 31
4.3 Consequences of Technology in Service Innovation ............................................................. 32
5 Conclusion ..................................................................................................................................... 35
Further research ................................................................................................................................... 36
References ............................................................................................................................................ 37

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Table of Figures

Figure 1 “Service Value added from 1970 to 2008 (% of GDP) in North America, OECD members and
worldwide”............................................................................................................................................ 13
Figure 2 “Service Value added from 1970-2009 (% of GDP) in some developed Countries” ............... 14
Figure 3 "Interaction between sectors in the modern economy" ........................................................ 17
Figure 4 “Targets susceptible to innovation in the firm” ...................................................................... 20
Figure 5 "Frame for Service Innovation"............................................................................................... 23

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Table of Tables

Table 1 “Broad Structure of NACE Rev. 2” ........................................................................................... 11

Table 2 “Firms functions susceptible to be outsourced and examples”............................................... 15
Table 3 "Production relation: Microsoft, Cisco and Google" ................................................................ 29
Table 4 "Diffusion relation: IBM server services and SAP” ................................................................... 30
Table 5 “Examples of Substitution relation within Self-Service” .......................................................... 32
Table 6 "Determination relation: Internet and new services and professions" ................................... 33

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

1 Introduction

1.1 Background

In the last 40 years in developed countries like United States and the European Union,
the economy has been experiencing a shift in its composition where the service sector
has been seen to significantly increase its share while surpassing the manufacturing
sector. Now days in these countries, services are responsible for more than 70% of the
GDP. As a consequence, there is also a shift in employment and the labor market, since
services rely strongly on labor forces and require more skilled employees.

Innovation has played the role of the main driver in the rise of service sector. However,
as the capacity to innovate in a firm increases, it gains competitive advantage and
generates a broader variety of offerings for its customer. In this sense, service firms
need to be customer-oriented, considering that the customer is the one who selects
from the variety of the offerings and acts as the determining factor behind the success
of the firms. Besides this, service activities are heterogeneous and innovation varies in
extent and form between industries.

Moreover, the competitiveness of a firm also depends upon its capacity to adapt and
exploit technology in order to fulfill and exceed beyond customers’ needs and
expectations, while maximizing resource utilization. The extent of adoption and interest
in technology varies amongst the different sub-industries within the service sector.
However, some surveys reveal that in developed economies, the service sector is the
biggest user and buyer of information technologies among other sectors, particularly
ICT.

This thesis analyzes the conceptual and theoretical framework of the role of
Information Technology in Service Innovation from the perspective of modern economy
and tries to contribute towards a better understanding of the phenomenon.
Additionally, it differs from the idea that services have a passive role in the innovation
system, since it considers services as an innovative sector. The approach to the
research question is done through an overview of the existing literature with examples
from the modern economy. The scope is limited to the services produced and carried
out by organizations through innovation process in developed countries. Moreover, the
scope also does not include how an organization can utilize their resources, processes
and various dynamics to become innovative.

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

1.2 Research Objectives and Question

Even though the relation between technology and the innovation process in the
manufacturing sector has been intensively studied, experiences of this sector cannot be
fully applied to the innovation process in services. These aspects differ especially in
technology and knowledge development, because of the particularities of the service
sector (Boden & Miles, 2000).

“Which is the role of technology in service innovation” is the research question.

Answering this question contribute to firms to respond properly to the challenges of the
modern economy, gain sustainable competitive advantage for the firm, improve
performance in service innovation and generate more variety in the response to the
customers’ needs. Moreover, usually information regarding service innovation and
technology is scattered in various sources and not compiled; therefore summarizing the
important aspects in one document can be helpful in understanding the concept
effectively.

1.3 Methodology

The research question and objectives are underpinned through an overview of existing
literature and conceptual work, which require an intensive recompilation of information
from primary and secondary sources. This requires selecting and extracting relevant
information to provide a conceptual framework and a theoretical foundation to
evaluate the research question. Within this context, services and service innovation are
the main objects of this study while highlighting the role of information technology in
these objects. Additionally, the study includes relevant examples from the modern
economy, in order to provide a pedagogic exposition of theoretical concepts.

1.4 Limitations

The scope is limited to the services produced and carried out by organizations through
innovation process in developed countries. The analysis does not consider how the
innovation processes and resources are organized inside the firms in order to limit the
research and avoid confusion.

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Moreover, research on services reveal different approaches on innovation, assimilation

approach, demarcation approach and synthesis approach (Coombs & Miles, 2000). This
research will continuously shift between the demarcation approach through authors
like Barras (1986) and Boden and Miles (2000) when highlighting differences between
both sectors, and the synthesis approach through Gallouj & Weinstein (1997) when
highlighting the trend in the transformation of those differences into similarities.

Considering the limitations in terms of time and that the main interest is on studying
the services innovation phenomenon, less importance has been provided to technology
itself. Consequently, technology is not studied extensively, even though it could be
expected to dedicate a chapter to analyze this element individually. Finally, it is
important to highlight that the term technology in this document refers particularly to
Information technologies and IT whereas the concepts presented in the third chapter
are oriented to technology intensive services and knowledge intensive services.

1.5 Structure

This thesis consists of five chapters. The chapters include an introduction with a
methodological explanation, theoretical discussion divided in three chapters and
conclusions.

Consequently, the first chapter is dedicated to the introduction and the methodological
explanation. In order to create a general framework, a broader introduction of the
service sector and its relevance in developed countries is presented in the second
chapter which also discusses some paradigms that led this sector to a relegated position
in the past. In the third chapter, the relation between services and innovation is
analyzed, since services have certain particularities that differentiate the sector from
others and determine the shape of the innovation within the sector. In the fourth
chapter, the role of Information Technology in service innovation is discussed while
describing the most relevant aspects of the relation between technology and service
innovation from three dimensions: services as users of Information technology, agents
of technology diffusion and producers of IT and particularly ICT technologies, which are
considered for some the third generation of information technology. Finally, in the last
chapter, the conclusion is presented.

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2 The Service Sector and Innovation: Breaking Paradigms

2.1 Service Activities are Not Homogenous

2.1.1 Services Definition

There are several definitions for services, see (Alter, 2008, pp. 63-64), and it seem that
there is no consensus on a particular definition. This document adopts the definition
proposed by Alter in his work, which originally came from a dictionary. This definition
refers to services as:

“Services are acts performed for others including the provision of

resources that others will use.” 1

Service firms provide mainly intangible products or acts; however this provision can be
followed by a tangible product or resource which complements the service. For example
dental services provide people with artificial teeth and fillings (Miles & Boden, 2000, p.
8).

Table 1 “Broad Structure of NACE Rev. 2”

Source: (Eurostat, European Commission, 2008)

Section Title Divisions

A* Agriculture, forestry and fishing 01-03
B* Mining and quarrying 05-09
C* Manufacturing 10-33
D Electricity, gas, steam and air conditioning supply 35
E Water supply; sewerage, waste management and remediation activities 36-39
F* Construction 41-43
G Wholesale and retail trade; repair of motor vehicles and motorcycles 45-47
H Transportation and storage 49-53
I Accommodation and food services activities 55-56
J Information and communication 58-63
K Financial and insurance activities 64-66
L Real estate activities 68
M Professional, scientific and technical activities 69-75
N Administrative and support services activities 77-82
O Public administration and defense; compulsory social security 84
P Education 85
Q Human health and social work activities 86-88
R Arts, entertainment and recreation 90-93
S Other services activities 94-96
T Activities of household as employers; undifferentiated goods and services 97-98

1
The reference or source is not provided in Alter´s work, (2008)

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producing activities of households for own use

U Activities of extraterritorial organizations and bodies 99

*Activities from sectors different to the service sector

Additionally, this definition highlights the main characteristic of service activity, the
diversity of the activities and business that the sector comprises, since the definition
refers to services as acts, and do not provide any limitation to these acts. Services goes
from activities or acts that require basic knowledge like house cleaning to more
complex and specialized activities like health care services. Table 1 “Broad Structure of
NACE Rev. 2” shows this variety of the services activities, where services have presence
in 17 of the 21 activities defined by NACE 2.

Moreover, each service activity can comprise several activities, which contribute to
extend the diversity of the sector. For example, Transportation services comprise land
transportation, air transportation, ocean transportation, rail transportation and
recently space transportation (Virgin Galactic). Transportation can also have a public or
a private character, which makes the classification more complex. Moreover, depending
if the objective is to transport people or goods, each activity becomes a different
industry. Transporting containers in a big ship from China to Copenhagen is a different
business compared to transporting tourists in a luxury cruise along The Bahamas in the
Caribbean Sea. There are differences in customer´s expectations, risk, knowledge,
regulations, pricing system and resources involved in developing the activity.

Other important characteristic of services is that they are value added activities, since
service activities go beyond the standard expectations of their target customers
through innovation in their offering. Moreover, the service sector gains additional value
through peripheral services. Considering that services are defined as the fusion of two
sets of activities: core services and peripherals services, where the peripheral services
deliver product differentiation to the firm (Gallouj F. , 2000, pp. 129-128). For example,
the mobile network operators have the same core service, to operate mobile networks
and to provide communication services. The customers make their choices considering
the additional services that each company offers. For example, number of instant
messages allowed, price system: per minute or per call, internet access and time in
terms of hours, contract time, and connection to other networks or operators.

2
Is the Statistical Classification of Economics Activities in the European community, is derived from ISIC. This
classification is used in most OECD countries.

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2.1.2 Services Dimensions

The variety of the service sector can be seen in the type of industry and business
comprised within the sector. However, studies conducted by Sunbdo (2000) shows this
variety from a different perspective that leads to several dimension of services. These
dimensions are not exclusive categories; certain service can develop more than one
dimension.

The first dimension involves producer services and consumer services. Some examples
of this type of services are household services such as cleaning, gardening, security
services and financial services. A second dimension of services includes Knowledge
intensive services (KIBS) like transportation and health care. This type also includes
manual services, like catering and tourism. The next dimension of services corresponds
to mass services and individual services. Examples of mass services are banks and
cleaning companies, while individual services, which are more customized to the needs
of each customer, are consultancy and care service.

Finally, the last type of services involves technology intensive services and technology
extensive services. Technology intensive services include Information and
communication technologies (ICT), for example software firms and banks, as well as
services intensive in other technologies, like transportation technology and medical
technology. Educational services, care services for elderly people and house repair are
examples of technology extensive services, which are more craft oriented work, use less
advance technology and non standardized methods.

2.2 The Tertiary Sector is Not a Parasitic Sector

2.2.1 Services are Not Residual Activities

Services have a new role in the economy, particularly in developed economies. In the
last 40 years, in Western Countries and some of Eastern European countries, services
are transforming economy´s composition, due to the rapid grow of the sector, see
Figure 1 “Service Value added from 1970 to 2008 (% of GDP) and

Figure 2 “Service Value added from 1970-2009 (% of GDP)”.

Figure 1 “Service Value added from 1970 to 2008 (% of GDP) in North America, OECD members and worldwide”

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Source: Adapted from the World Bank National Account Data and OECD National Accounts files

80
75
70
65 OECD members
60 World
55
50 North America
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
Figure 2 “Service Value added from 1970-2009 (% of GDP) in some developed Countries”

Source: Adapted from the World Bank National Account Data and OECD National Accounts files

80 Belgium
75
70 Canada
65 Denmark
60
55 Finland
50 France
45
Germany
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009

Japan

In these countries, the service sector surpasses and doubles manufacturing sector´s
contribution to the economy. Services accounts for more than 70% of the GDP (World
Bank national accounts data, and OECD National Accounts data files). However, this
phenomenon vary in extent between developed economies because of the differences
in several interrelated factors like services policy conditions, market dynamics, climate
for risk taking, venture capital supply and regulation barriers (OECD, 2000, p. 4).

An important factor in this growth of the service sector is that outsourcing activities are
increasing their share in the economy. The division of labor allowed the manufacturing
sector to focus upon specialization of production or the core of the business in order to
increase their profits (Arora & Gamberdella, 1994). As a consequence, manufacturing
firms tend to contract out those activities that were more expensive to carry out within
the firm or were less efficient (Coombs R. , 1999). Now days, all different sectors appeal
to outsourcing, even the service sector. Moreover, demand for these activities

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previously carried in-house is increasing and external providers are becoming more
specialized, contributing to enhance the service economy and narrowing the
manufacturing sector (Stigler, 1951).

Table 2 “Firms functions susceptible to be outsourced and examples”

Source: Adapted from (Miozzo & Grimshaw, 2006)

Internal
management Relate market for business Example of major providers
functions services
Administration Management Consultancy McKinsey, KPMG
Legal Services Deloitte Touche Tohmatsu
Auditing and Accountancy Accenture
Human Resources Temporary Work Agencies Manpower
Personal Recruitment Adecco
Professional Training Spherion Corporation
Finance Banking Citigroup, Bank of America
Insurance Generali Group
Renting and Leasing Rental Services from Atlas Copco
Information systems Software and IT Services Microsoft, IBM
Telecommunications Vodafone, China Mobil
Marketing and Sales Advertising Omnicom Group
Distributive Trade
Public Relations Edelman
Fairs and Exhibitions
After sales-services
Transport and Logistic DHL, UPS
Logistics Transport services MAERSK
Express courier services FedEX

Table 2 “Firms functions susceptible to be outsourced and examples” shows some

internal functions in the firm susceptible to contract through outsourcing, followed by
some examples of more specialized activities and examples of the larger provider of
those services in the modern economy.

2.2.2 Services are Intensive in Low Skill Labor Force

The rise of the service sector is also affecting employment and labor market. Services
are surpassing the manufacturing industry in number of employees and producing a
shift in the distribution of employment and patterns in the division of labor (Miles &
Boden, 2000, p. 4). In developed countries, three quarters of labor force is employed in
the service sector (Preiβl, 2000, p. 66). Some of this new labor force is low skilled while

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other is mainly high skilled. For example, some services activities like consultancy firms,
that sell knowledge to other organizations, and banks that provide information to their
customers, require more educated employees, with specialized knowledge and special
skills to manage customers. Moreover, skills are becoming more important in the
service firms, especially technical and client skills, considering the need of the contact
with the client.

The large number of employees in the service activities led the sector to less
productivity than in the manufacturing sector (Preiβl, 2000, pp. 67-68). Services are
employing more people than manufacturing and the services share in GDP is less than
in employment. Therefore, each employee from the services sector produces less
output than an employ from the manufacturing sector. Services’ share in employment
and GDP also differ amongst countries due to the differences in the job market
composition. Part time jobs are more widespread in the service sector and in specific
countries. However, on average, output per person increase faster in the manufacturing
sector than in services.

In order to improve productivity, service firms in developed countries are adopting

technology. Since, according to the Baumol Effect, as economy develops, services
become more expensive while manufactured products become less expensive
(Bannock, Ron, & Davis, 2003, p. 27). Increase in productivity leads to lower prices, and
productivity improve through investment in technology. However, technology adoption
leads to the framework of the “productivity paradox”, where it is expected that
investment on IT over time will be reflected in improvements in profitability or
productivity for the firm. Nevertheless this return does not always shows up clearly on
the bottom line of firms (Attewell, 1994, p. 24), perhaps because of the difficulty in
measuring services outputs, which are hard to define precisely.

2.2.3 Services Activities are not Isolated Activities

Services activities are not isolated in the economic system, contrary to the classical
theories; services are more and more related and integrated to other sectors in the
modern economy, and there is permanent exchange between all the sectors. Services
are using technological products of the manufacturing sector, from lifts and drills in
construction, to trains and automobiles in the transport sector. Other sectors are
demanding more and more services and innovations. Moreover, services add value to
other sectors (Howells, 2001, pp. 60-67); since services add differentiation and

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sustainable advantage to them through outsourcing services, complementary services

and embodied services see Figure 3 "Interaction between sectors in the modern economy".

As mentioned before, the manufacturing sector experienced a rise of the outsourcing

activities, increasing the market for specialized service provision. In this context services
providers like KIBS add value to the manufacturing sector through innovation; their
services are not just a substitution of activities developed previously in house (Gallouj &
Weinstein, 1997). Companies like FedEX and UPS allow the manufacturing sector to
deliver their products to their customers in record time and to keep them informed of
the shipment status through internet. No manufacturing company can deliver their own
products with the same efficiency and affectivity than specialized companies.

Figure 3 "Interaction between sectors in the modern economy"

Source: Own creation

Embodied
Services

Products
Technology
and Services

Other Other Complementary

Services Sectors Services

Innovation Knowledge

Services
Outsourced

Complementary services are adding value to the manufacturing sector´s offerings. In

order to satisfy demand more effectively and focusing on customers needs, the
manufacturing sector is changing the way which could address customers, since it
includes services related to their products in the offering (Porter, 2008, p. 23)
(Howells, 2001, p. 61). For example General Electric, count today with “the world’s
largest retailer finance program provider” 3, GE Money Bank, which was created initially
to finance the purchase of GE home appliance products and in technology companies

3
http://www.gemoney.com/en/personal/about_us.html, 03/04/2011

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for example, one half of revenue come from services (Wood, 2007) like maintenance
and technical support, extended warranty, training and business consulting.

Another practice used is the encapsulation of products with a service (Howells, 2001),
like Rolls Royce with their aerospace engine. Instead of selling a product for a fixed
price, the company turns to offer a service in terms of hours of flight. This example
shows how the customer is more aware of the life cycle of the products and is
demanding services that integrate all stages of the product life cycle. The differentiation
of the product is not only the features and the efficiency in particular task. As a result,
services allow the manufacturing sector to establish a long term relationship with their
clients, and add value to their offerings as a source of sustainable and strategic
competitive advantage (Grönroos, 2000, p. 6).

2.2.4 The line Between the Tertiary and Secondary Sectors is not Clear

Despite the diversity of the service activities, within the services it is possible to identify
some common variables or characteristics (Tidd & Bessant, 2009, p. 427), like quality
and performance perception, product intangibility, simultaneity in production and
consumption, need of interaction with customers, customization, regulation and
difficulty to storage. These characteristics represent the fundamental differences
between services and manufacturing. However, additional differences can be derived
from these attributes, like technology orientation, innovation cycles and technology
impact in employment productivity among others.

Services attributes differ on intensity or level in each service, depending on its nature,
aims and situation. For example, the food service activity comprises two trends, one is
where the restaurant staff offers service and the other is self-service. If the restaurant
staff offers service, it adds value and convenience for the customer whereas Self-service
aims for cost efficiency and low cost for the business. Both services differ in the
intensity in quality perception, customization and interaction with the customer.
Services characteristics vary between services activities.

Over time these characteristics and their extents within a service industry can change,
because of the market dynamics and the adoption of new technological innovations.
For example in the bank industry, customers wanted to utilize bank related services
without moving from their places. As a result, banks adopted new technologies and
today they provide their services across multiple platforms, like internet and mobiles. In
this industry, the place where the service is produced is not anymore the same place

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where it is consumed and the face to face interaction with customers each day is
reducing. This transformation is taking place in all service industries; almost all services
have changed from how they were a few years ago.

Moreover, services in some cases are adopting characteristics traditionally associated

with products (Gallouj F. , 2000, p. 129). For example, in the entertainment industry,
movies and other performances can be recorded and produced on a mass scale for
further consumption, which is a characteristic from products. Furthermore, the movies
are boxed and exhibited in the store’s shelves like any other manufactured product.
Services are permeating the whole economy and each time is more difficult to
distinguish if a company belongs to the service sector or to the manufacturing sector
(Barras, 1986) (OECD, 2000, p. 7).

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3 Shaping Innovation in the Service Firm

3.1 Building a Frame for Innovations in the Service Firm

3.1.1 Targets Susceptible to Innovation in the Firm

Services can be seen as the composition of four basic components: Production,

Offering, Delivery and Finance.

Figure 4 “Targets susceptible to innovation in the firm” shows these four components
and the targets covered by each dimension. Production and offering refer to the core
competencies that posse the firm and the services that can be produced with those
competences. Delivery and Finance correspond to customers’ needs, and how the firm
can create new business models or a new network of partnerships to deliver a service
that satisfies their customer’s needs.

Figure 4 “Targets susceptible to innovation in the firm”

Source: Adapted from (Ezell, Ogilvie, & Rae, 2007, p. 7)

The extent and the forms in which the firm innovates vary between the services firms
(Pavitt, 1984, p. 353). Identifying the targets of renewal in a firm can lead to the

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identification of the innovation pattern followed. For example, an analysis of the car
rental industry in United States reveals that most of the innovativeness effort of this
industry is in customer service, service system and service performance targeting (Ezell,
Ogilvie, & Rae, 2007, p. 7). Moreover, this analysis combined with customer needs can
be useful to identify which are potential targets to be renewed.

3.1.2 Types of Innovation in Services

Francis and Bessant (2005, pp. 172-180) proposed in their four types of innovation in
services: product innovation, process innovation, positioning innovation and paradigm
innovation. These forms of innovation are similar to the ones proposed by Schumpeter
apart from what he called new raw material innovation, which is relevant to
manufacturing. Gallouj (2000, pp. 139-143) introduced other forms of innovation in
services that Francis & Bessant did not cover completely with their classification:
Formalization innovation and Ad hoc innovation.

The different components of a service can be associated with the types of innovation
mention above. Process innovation is related with the production component, since
this type of innovation change the way the offering is created. Innovation positioning
takes form changing the context in which the offering is delivered and most cases of
this innovation are related with brands changing their target market or creating a new
one.

The offering component in services can be related to product innovation, formalization

innovation and ad hoc innovation. The introduction by ICA of a new supermarket
format is considered a product innovation, because it depicts a change in organizations
product or service. The organization of work in McDonald´s is an example of
formalization innovation and it consists of putting in order the service characteristics,
whether tangible or intangible. Ad hoc innovation refers to how a service can be
customized or adapted for the specific needs of a client.

Finally, paradigm innovation is related to the finance component and occurs when the
change takes place in the mental model which frames what the organization does. This
type of innovation in turn can be categorized into two types of innovations, inner-
directed (organizational competences) paradigms and outer-directed paradigms
(business models) innovation.

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Innovation in services is often more integrated than in other sectors like the
manufacturing sector (Sunbdo, 2000, p. 112). The simultaneity of production and
consumption characterized in services provide more integration amongst the
production process and the product, in time and function, than manufacturing.
Therefore, innovation taking place in service inherits this characteristic and each
innovation often involve several types of innovation (Sunbdo, 1992), where process
innovation has more emphasis.

However, over time the evolution of knowledge and the technological change make
possible to the service firm to innovate or transform targets that were unthinkable
before, generating new types of innovation and increasing the possibilities to innovate
to a huge number.

3.1.3 Extent of Novelty Involve in Service Innovation

Innovation is about transformation and according to the extent of novelty involve in the
change, the innovation in the service can be radical or incremental (Freeman & Perez,
1988, pp. 45-47). Radical innovations are discontinuous events, which result from a
deliberated research process and the product is a totally new service with different
characteristics and competences from the old service. Insurance companies of care and
assistance products for example, are seen as radical innovators that has created a new
system (Gallouj F. , 2000, p. 139). These companies are not any more offering life
insurance, saving or damage insurance products, instead are providing services. Radical
innovations provide companies with the advantage of the first mover.

Mean while, incremental innovation occurs more or less continuously, and this
innovation comes from suggest inventions and improvements made by the individuals
involve directly in the production process or as a result of initiatives and proposal from
users. These innovations improve specific attributes by substitution or addition of
characteristics, without modifying the structure of the target or system (Gallouj F. ,
2000, p. 139), providing the company with strategic and cost advantage. Most service
innovations are non-technological and mostly involve small and incremental changes in
process and procedures.

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

3.1.4 The Market is the Natural Limit for Innovation

From a Schumpeterian perspective, innovation differs to an invention in the sense that

innovation is adopted by a market and this market is the filter to the survival of the
innovation over time. This leads to establish the meaning of market in terms of
innovation. The market is the user or potential users of the innovation which can be
completely new or already existing referred to as current. Similarly, radical innovations
can be interpreted as “new to the world” while incremental innovations are “new to a
region or a country” or “new to a sector or an industry”.

Figure 5 "Frame for Service Innovation"

Source: Adapted from (Ezell, Ogilvie, & Rae, 2007, p. 7)

Novelty
Radical

Incremental
Inside Outside
Current Target

New
Market

The frame for innovation can be represented with three axes, represented by degree of
novelty, target being transformed and the market, see Figure 5 "Frame for Service
Innovation".

3.2 Innovation Patterns in Services Firms

Innovation is not an isolated process (Coombs & Matcalfe, 1998, p. 11), and a
substantial rate of innovation comes from co-operative efforts (Howells & Tether,
2004, p. 26). Innovation is more a result from interaction between several institutions
like suppliers, competitors and customers, among others. Therefore innovation
capabilities are everyday less allocated within a single firm and increasingly distributed
across a range of firms and other knowledge generating institutions. As a consequence,

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

bi-lateral and multi-lateral cooperation between manufacturing and service firms are
more frequently reached within the innovation process. Usually these efforts also turn
into collaboration with public research establishments or involve the end user.

However, the firm is the one who lead the innovation process according to their own
requirements. Service firms are diverse and innovations are approached differently in
each firm. Sudbo and Gallouj (2000) identify six innovation patterns in services firms.
Below are described these patterns complemented with examples from KIBS (Miles,
2003, pp. 86-87). These patterns reflect the variety in the innovative efforts within the
service sector and the variety of industries within the KIBS.

The classic R&D pattern is followed by firms that dedicate specialized centers to
research & develop and innovation is a continuous effort within the firm. This is the
case with large software and telecommunication firms within KIBS, which are
specialized in production of standardized operational services. Generally these firms
have more similarities with the manufacturing firms than with other firms within the
service sector. This is the case with companies like SAP and Accenture which have large
networks of R&D centers. SAP for example, have a “SAP Labs network” with more than
10 labs or R&D centers worldwide 4.

The medium sized “professional knowledge” KIBS follows a service professional pattern.
This pattern is characterized by the use of certain norms and methods in a cooperative
innovation process. Firms that commercialize their experiences and understandings to
resolve problems in specialized disciplines are examples of service professional pattern.
Accountancy, management and some IT firms like IBM use a combination of this pattern
and the classic R&D pattern. For example, IBM and MIT School have a partnership
through MIT Computational and Systems Biology Initiative (CSBI) to research in areas
such as proteomics, genomics, image informatics and structural biology 5.

The third type of innovation pattern corresponds to the organized strategic innovation
pattern. This pattern does not implicate a classic R&D department and research and
development are seen as diffused and are accomplished by ad hoc teams. However,
innovation is an important aspect of the strategy in these types of firms. This is also the
most common pattern in innovative service firms and KIBS like accountancy firms,
financial and market analysis firms and global consulting firms. Some examples are
Delloite, PriceWaterhouseCoopers and Generali Group.

4
http://www.sap.com/press.epx?PressID=702, 10/04/2011
5
http://csbi.mit.edu/overview/index.html, 10/04/2011

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Entrepreneurial pattern is followed by firms’ dedication towards creating and

commercializing services around radical innovations. These firms do not possess an
R&D department; therefore their innovative orientation is to make improvements to
the initial innovation. Several IT services and other KIBS can be catalogued in this type
of pattern.

Restaurants, cleaning services, guard services and hotels, and small KIBS addressing
local markets follow the artisanal pattern. These small service firms do little or no
innovative effort. Finally, Network pattern applies when several service firms create a
network firm, which innovate on behalf of the members or induce innovation to them.
Some tourism services, financial services and KIBS needing sponsorship to innovate, or
needing to reach out to the market through ecommerce follow this pattern.

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

4 Service innovation and Information Technology

To satisfy customers’ needs is the main challenge for firms. In this sense, service
companies need to be customer oriented. Moreover, the competitiveness of the service
firms depends on their skills to adapt and exploit technology in terms of cost, delivery
requirements, service level, customization and service flexibility. This is required in
order to maximize their customer experience and performance for resources (Metters,
King-Metters, Pullman, & Walton, 2008). Therefore according to the industry, the
extent of adoption and interest in technology vary within service firms. However the
services sector in average is the main buyer and user of information technologies in
developed economies (Kustscher & Mark, 1983).

In chapter 2, the concept “Knowledge Intensive Services” (KIBS) was introduced as a

service dimension. Services comprised in this dimension provide other firms with
knowledge that solve certain requirement of client´s organization, from the public and
private sector. KIBS generally, operate within a narrow area of knowledge or expertise.
Therefore, the character of this knowledge shapes the innovation effort and the
contribution of the KIBS in the service innovation (Miles, Kastrinos, & Flanagan, 1995),
KIBS are considered the most innovative firms within the service sector.

Some KIBS are traditional professional services, while others are new technology based
services. In this chapter, the role of technology in service innovation is explained
through KIBS examples since these firms are users, agents and producers of technology,
particularly information and communication technologies.

4.1 Sources of Technological Innovations in Services

Sectors differ in extent and forms of innovation (chapter 2), in the intensity and
characteristics of technology adopted (technological trajectories) and in sources of
technology (Pavitt, 1984). Considering that service firms are users and developers of
technologies, Soete and Mizzo (1990) based on Pavitt´s work suggests three different
patterns of technological innovations in service firms. Their work is grounded on the
sources of technological innovations, user needs and appropriating benefits.
Considering that technology is not the only source for innovation, this taxonomy lacks
consideration in the non-technological component of innovation (Gallouj & Gallouj,
2000, p. 30). However, it is still relevant for the purpose of the research in this
document.

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“Supplier dominated” is the first of the three types of services firms proposed by Soete
and Mizzo. In this type of service firm, the source of innovation is dominated by
suppliers of equipment and technical systems. These firms do not participate in the
development of the technologies they use, their technological trajectories are defined
in terms of cost efficiency, therefore a relatively high portion of their innovation
activities are oriented to process innovation. These firms can be classified under two
subcategories: personal services and public & social services. Personal services, like
food and hospitality, generally respond to small firms where users are sensitive to
performance. The second type, public and social services, correspond to education,
health care and public administration. Generally, this last type of supplier dominated
firm is associated with large firms, where users are sensitive to quality and technology
appropriation is not allowed or is public.

The other two types of service firms are “physical and information networks” and
“specialized supplier and science based firms”. These services firms are more involved
in the development of the technology they used. Network firms take advantage of
technology to reduce cost and support their networking strategy, users are price
sensitive, the firm size is large and technology appropriation is by standards and norms.
These firms can be associated with physical networks, like transport and wholesale
distribution, or with information networks, like finance, insurance and communications.
The sources of technology in network firms are in-house through engineering and
production departments or suppliers of equipment and technical systems.

The third type of service firms is “specialized supplier and science based firms”. These
types of firms have an important output of technological innovations. These
technological innovations are researched and developed in-house, the user is
performance sensitive and the firm size generally is relatively small. Technologies are
adopted mainly based on the system design and protection of this technology is
ensured through copyrighting, product differentiation and know-how.

4.2 Services as Users, Producers and Agents of Information technology

4.2.1 Information Technology adoption and innovation in services

In a first stage, services firms adopt technology to improve actual process efficiency in
the services provided, while decreasing costs. After gaining improved quality and
delivery in these services through radical innovation, technology provides the basis for a
complete new service. Consequently, in the third stage can emerge new industries or

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can occurs a diversification in the firms offering, in order to supply the new services.
This process of technology adoption in services is called “reverse product cycle” (Barras,
1986).

Consequently with barras model, in the first stage of technology adoption, innovation in
services is in some sense spontaneous, it does not follow a specific pattern, since there
is no R&D effort and the source is “supplier dominated” (Gallouj & Gallouj, 2000).
Innovation is characterized by incremental process to improve efficiency. In the second
stage innovation is performed through radical process innovations in order to improve
effectiveness. Finally in the third stage innovation is no longer dominated by supplier,
and the driver is to generate product differentiation. This is achieved through radical
product innovations and lead to emergence of the different patterns of innovation
suggested by Soete and Mizzo (1990), due to the need of establishing an R&D function
(Barras, 1986).

“Extensive technology services” follow the first stage of technology adoption, whereas
these firms usually do not proceed with a second stage of technology adoption.
Meanwhile intensive technology services develop the three stages of technology
adoption. However, technology itself does not provide economic benefits to the firms.
The capacity of the firm to adapt to technology and its benefits depends on their
capacity to translate those benefits into product and process and to defend them
against imitators..

4.2.2 Services as Sources of Technology

Services acts as a source of technology due to the production or co-production of

technology (Gallouj & Gallouj, 2000, pp. 25-26). KIBS comprise ICT services among
others services, which are telecommunication companies and software producers. In
this case, services become technology producers directly, in order to provide
themselves or their customers with new technologies. Additionally, a service firm can
become a technology producer through pressure or persuade other producers
indirectly, see Table 3 "Production relation: Microsoft, Cisco and Google".

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 Understanding the Role of Technology in Service Innovation: A theoretical Overview

Table 3 "Production relation: Microsoft, Cisco and Google"

Source: Own creation

Case New service Motivation

Toyota- Partnership to develop a solution that bring Toyota persuades Microsoft to
Microsoft 6. access to multimedia, telecommunications develop a new service in order to
information, GPS and energy management on add value to their vehicles.
the go, in Toyota´s vehicles
Cisco with Cisco developed video support for their Customer´s expectations and the
Apple and devices allowing them to run Android and dominant position of these OS
Android 7 Apple´s operating system, including iPhone pushed Cisco to enhance their
and iPads. service of IP interoperability and
communication system.
Google with Google TV allows users to search for internet Google persuaded producers to run
Internet content and online video from their television their service in order to develop a
Media and screens. Google have agreement with Sony, new market of video on line and
HDTV 8 Logitech and Vizio (running on Intel´s ship) create an opportunity to increase
now is working in a new agreement with revenue from more ads.
Samsum, who is going to develop its own ship
for Google.

4.2.3 Services as Agents of Technology

These service firms are users of technology however, their importance lies in their role
as producers and transfer agents of new technologies. KIBS like consultancy firms and
training services are direct agents and carriers of technology (Miles, Kastrinos, &
Flanagan, 1995). This is the case of several technological companies which provide
training and project assistance in order to diffuse their own technology or a technology
from a partner, generating an additional source of incomes. Table 4 "Diffusion relation:
IBM server services and SAP” show examples of high technology consultancy firms that
assist to disseminate technological and organizational innovations (Moulaert, Martinelli,
& Djellal, 1990). Other services play this role indirectly through the provision of services
that favors the diffusion of technology or services that provide knowledge about a
specific solution, in order to make it sustainable for client over time (Miles, Kastrinos, &
Flanagan, 1995).

6
http://www.examiner.com/business-news-in-syracuse/microsoft-and-toyota-partnership-to-power-smart-
cars
7
http://www.itworldcanada.com/news/cisco-adds-iphone-ipad-support-to-security-system/142908,
11/04/2011
8
http://blog.jr.com/samsung-and-google-tv-a-winsome-pair/, 11/04/2011

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Miles (2003, pp. 101-105) distinguish in his model six different roles of KIBS as agents of
innovation. These roles can be informative, diagnostic, advisory, facilitative, turnkey
and managerial.

Table 4 "Diffusion relation: IBM server services and SAP”

Source: IBM Website , SAP Website and Microsoft Website

9 10 11

Firm Service Technology or innovation

IBM and Optimization and Integration BM System i™
their server Server Managed IBM System p™
services Emerging Server Technology IBM System x™
IBM System z™ servers
Linux® and Microsoft® operating systems
non-IBM server products
SAP Business analytic Sap Business Suite
Performance and insight optimization
IT transformation
Business transformation
Program, project management, and
quality assurance
Software maintenance and support
Custom development
Training and certification
Microsoft Microsoft Office Specialist Ms Office
Microsoft Office Specialist Master
Microsoft Office Specialist Expert

The informative role contribute with information of attributes of the companies

environment or position within it, from where the client derivate their obstacles and
the strategic response. The service firm invests in research to collect, translate and
analyze data, in order to transform it into relevant information for their client. Market
intelligence, financial analysis and digest of regulations are examples of informative
role.

The second role is diagnostic, assisting the client to scheme and distinguish the
character of a problem. This is the case of the market research firm which points the
issues in the client image. The advisory role proposes and evaluates several alternatives

9
http://www-935.ibm.com/services/us/en/it-services/gts-it-service-home-page-1.html, 11/04/2011
10
http://www1.sap.com/services/portfolio/index.epx, 11/04/2011
11
http://www.microsoft.com/learning/en/us/certification/cert-overview.aspx , 12/04/2011

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to solve clients’ problems. This role implicates active interaction with the client across
the firm. For example, computer services suggest and help to select the appropriated
system or group of systems to be used within the firm.

“Facilitative” is the fourth role and support the firm with the aspect of implementing a
solution. Training services provide the firm with the skills required to support a process
within the organization, and may be adopted despite the absence of technological
innovations. Generally this role is used when the staff is to be provided with skills and
capabilities to develop their job.

When the knowledge provided by the KIBS correspond to generate and install the
resources require to accomplish the solution for the client and the know how to
maintain the solution over time, it is called Turnkey role. Finally, the managerial role is
when the KIBS execute the solution for the client. Outsource computer,
telecommunication and building management are examples, where the KIBS
perpetuate their current role in managing the resource.

4.2.4 Other Relations between Technology and Service Innovation

The relation between technology and services is not limited by the adoption, usage and
diffusion of technology in services, according to Gallouj & Gallouj (2000, pp. 25-26)
other relations can be distinguished: substitution relation, identity relation,
determination relation.

A substitution relation for example, is when substituting technical capital for human
capital in the back office or in the interaction with the customer. Automated teller
machines and other technologies which support the self-service are examples of this
relation (Gershuny, 1978). Table 5 “Examples of Substitution relation within Self-Service”
illustrates some examples related to the self-service.

Identity relation is when the characteristics of the service provided influence the value
of the technology. This is the case of telecommunication services with electronic
mailing, fax and high definition video. Determination relation is another type of
relation between technology and services. In this type of relation, technological
innovations are the origin of the new service function. Information technology is an
example, which gives rise to new professions and services.

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Table 5 “Examples of Substitution relation within Self-Service”

Source: Adapted from (Karp)

Service Industry Human Contact Technology Assisted Electronic Service

service
Banking Teller ATM Online Banking
Grocery Checkout Clerk Self-Checkout Station Online order/Pickup
Airlines Ticket Agent Check in Kiosk Print Boarding Pass
Restaurants Wait Person Vending Machine Online order/Delivery
Movie Theater Ticket Sale Kiosk Ticketing Pay for View
Book Store Information Clerk Stock-Availability IPAD
Terminal
Music Store Information Clerk DVD reader IPHONE/IPOD
Library Librarian Computer Database Electronic library
Education Teacher Computer Tutorial E-Learning
Gambling Poker Dealer Computer Poker Online Poker

4.3 Consequences of Technology in Service Innovation

As mentioned in chapter 2, new technological innovations are changing the

characteristics and it extent in some services. This change is affecting different services
in a different way, considering the diversity of the sector and the differences in extent
and forms of innovation. However, innovation in services are being impacted through
the adoption of new technology in their production, delivery, offering and finance
components, see

Figure 4 “Targets susceptible to innovation in the firm”.

The service production is being facilitated by the adoption of technology, considering

that the innovation process and the core process of the firm are improved due to the
interaction between the different stakeholders and transfer of knowledge. This allows
them to extend their core competence through know-how integration (Kandampully,
2002) and the automation of their access to primary sources of information.
Additionally, it links the firm with the customer (Kandampully, 2002) and acts also as a
customer experience integrator.

The service delivery is being affected, since the need of interaction with the client is
being changed by a “substitution relation”. As a result, the need of face to face
interactions in some services is disappearing and the delivery of the service is changing
in time and space, integrating more and more consumption and production of services.

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Other characteristics of services delivery like intangibility, and storage difficulties are
also changing through the adoption of information and communication technologies,
ICT.

Table 6 "Determination relation: Internet and new services and professions"

Source: Own creation

Internet New Service or profession

Websites Web designer
Web content administrator
Internet security specialist
Ads- Marketing online Internet Marketing specialist
Blog
Blogger
Sales online Pay online system (Paypal)
Secondhand sale (Blocket.se)
Purchases in group (Group-on)
Social Networking Social Games (Farm Ville)
Data mining from Social Networks
Communications E-mail
Chat
Others Maps (Google maps)
Translators online
Information backup online
Search engines
Access to free music (Spotify)
Online certifications (Vue Person)

The service offering is been affected. Technology adoptions can originate new services
through the “determinant relation”. Internet is an example, which gave rise to new
professions and an uncountable number of online services, see Table 6 "Determination
relation: Internet and new services and professions". In this case technology is the base for
innovation in services.

Finally service finance is impacted; technology provides the possibility to innovate the
targets in new ways which were previously unthinkable, like business models. Zynga Inc.
developed an interesting business model base in the social network gaming. This
business model corresponds to Farm Ville, an online game on Facebook by Zynga, which
consists of “build up a virtual self worth”. This game engages users with free play and
sells virtual items to accelerate the game or building of their “net worth” 12.

12
http://www.passivelifeincome.com/others/zynga-business-model-nothing-short-of-amazing,

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As a general consequence, the innovation cycle in service firms is becoming shorter,

which is a challenge for the service firms, considering that they need to adapt to face
the conditions of high competence and higher rate of change created in the market
place.

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5 Conclusion

The findings of this research suggest that technology and services in some extent share
a symbiotic relationship. The service sector through KIBS, intensive technology services
in particular, is a user, producer and agent of technology, which contributes to the
development and diffusion of technological innovations. All the levels of technology
adoption lead to innovation in service firms. Therefore, we can conclude that
technology has an important role in services innovation.

The proposed research question has been answered by extensively investigating and
discussing how the adoption of technology or technological innovations is affecting
innovation in the service firm. This help in identifying and understanding “Which is the
role of technology in service innovation”. For instance, technology facilitates the
integration and transfer of knowledge from different sources, and the interaction
among different stakeholders of the innovation process, both external and internal. It
also modifies service characteristics, which lead to shorter services cycles, impacting the
production and delivery of new services, while targeting clients more effectively.
Furthermore, technological innovations are enabling service innovation creating new
possibilities to innovate. This belief is complemented by considering that they provide a
platform for new services and professions, and impact components of the services that
before were difficult. This impacts all the targets susceptible of innovation within the
firm, providing new opportunities to innovate.

Finally, from a holistic view, one can conclude that the main role of technology in
service innovation is as a source for innovation. Technology facilitates and enables
innovation, which can lead the firm to gain sustainable competitive advantage in
current markets or to establish new markets through novel or improved services. The
traditional role of technology as source to improve productivity in the firm continues
valid. However, this research contributes to understand how technology is not only a
source for efficiency and effectiveness in services. Technology can also contribute in
productivity from the innovation process, as a source for innovation, which can be
reflected in larger improvements in profitability.

Moreover, this conclusion represents a challenge to the service firm, since it leaves
room for a non-technological driver for innovation in the firm. This driver defines the
firm´s propensity to innovate and exploit the possibilities and opportunities that
technology provide in the innovation process on behalf of the customers.

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Further research

Through the document is proposed a system to identified innovation in service firms

ground in the component of services. However, the method or methodology require to
measure service innovation based on technology or to which extent innovation in a
service firms correspond to technology, should be addressed by further research.

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